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Does New Zealand need a banking inquiry?

Makes cents: An inquiry into New Zealand's banking sector is a "great idea" according to one of the country's top financial advisers. Photo / Getty

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Australia is reeling from revelations about its financial institutions but we’ve been told there’s no need for an investigation here. Not everyone agrees — including financial adviser Brent Sheather.

New Zealand has always been an exceptional country and has become even more exceptional recently — thanks to the prophylactic properties of the Tasman Sea. Despite the fact Australia’s banking and financial services sector are having daily convulsions at a Melbourne inquiry looking into their often fraudulent and sometimes corrupt practices, we are told their subsidiaries here remain untainted by whatever virus has infected their parents.

Day after day, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry throws up evidence of the most outrageous rorts. One of the most notorious examples to grab headlines has been Commonwealth Bank of Australia’s habit of charging dead people for financial planning advice — in one case for nearly a decade.

We could happily watch this slow-motion dismembering with a satisfying shot of schadenfreude if it weren’t for the uncomfortable fact that the Big Four across the Tasman own all our major banks. And that financial services firm AMP, which is being similarly disembowelled, also operates here, with more than $16 billion of New Zealanders’ money under its management.

Damning revelations about AMP’s conduct in Australia show not only that thousands of customers were deliberately charged for services they never received, but that AMP repeatedly misled the Australian Securities and Investments Commission about that unfortunate fact. So often, indeed, its head of financial advice, Anthony “Jack” Regan, laughed embarrassedly when confessing the company had lost count of exactly how many times it had misled ASIC.

AMP New Zealand’s website shows Australia-based Regan currently has responsibility for AMP’s operations here. He was managing director of AMP in New Zealand for 10 years and became a New Zealand citizen in May 2013.

This sort of cross-fertilisation at the most senior levels of the financial fraternity in both countries is common. Nevertheless, we are assured we don’t have to feel uneasy about our close links with organisations that have been exposed as engaging in corrupt and illegal practices in Australia because the “culture” is different here.

Nothing to see here...

At least that is the view of Adrian Orr, the new head of the Reserve Bank, who told TVNZ’s Q&A that there is no need for an inquiry: “The true problem and challenge that is going on in Australia is cultural. It’s not whether the regulator was awake or asleep. It’s cultural.”

Commerce Minister Kris Faafoi echoed the Reserve Bank governor: “New Zealand is a different environment and I have seen no evidence that these incidents are being replicated here.”

Orr, Faafoi and Scott-Howman must believe a lot has changed in the “systemic” culture of our financial institutions in less than seven years. In October 2011, when hundreds of thousands of New Zealand investors were grappling with having lost billions in failed finance companies, tax expert Tony Molloy, QC, told a parliamentary select committee: “Meaningful consideration of investor protection legislation is impossible without first identifying the culture of the New Zealand market that has treated investors as prey, rather than as fellow citizens engaged in an enterprise from which all might profit to the benefit of the nation as a whole.”

Many of us will find the description of “prey” entirely apt about our own personal dealings with banks and other financial institutions. And not everyone in the business is convinced by the parade of influential figures telling us our financial services culture is above suspicion.

Are Kiwis getting a fair deal?

One notable dissenter is financial adviser Brent Sheather, who manages $1 billion in funds for retail investors and who is regarded as one of the best in the country. When NOTED asked him if he thought an inquiry into the banking and finance sector was a good idea, he replied: “It’s a great idea!”

As he says: “My company charges a quarter of the fees the banks charge [for funds management] and we’ve made a lot of money so you can imagine how much the banks are making. I’m independent and have no axe to grind. My only concern is that investors in New Zealand get a fair deal.”

His criticisms of the current setup centre on the fact the banks are, in his opinion, hopelessly conflicted. He focuses, in particular, on “the usurious activities of the financial planning arms of vertically integrated organisations”.

“Vertical integration” is a term you’ll hear a lot if you follow the Australian royal commission’s progress. For banks, it means they not only own fund managers, they also offer financial planning. Basically, banks become a one-stop shop for all of a customer’s financial needs, and their advisers inevitably sell their own company’s products while purporting to be independent.

In New Zealand, all the Big Four banks — Westpac, BNZ, ASB and ANZ — have wealth management services or KiwiSaver funds, with tens of billions under management.

“The banks masquerade as independent when they clearly aren’t,” Sheather says. “As someone who has been in this industry since 1984, I can tell you that while the extent of the damage may not be as extreme in New Zealand as in Australia, most vertically integrated organisations are stealing a large proportion of retail investors’ retirement funds in New Zealand — and particularly those people with small sums of money, including KiwiSavers.

“For a start, fees on New Zealand managed funds are extremely high relative to returns, all the fees are not disclosed — such as trading costs — and unfair performance fees are extracted using methodologies which are illegal in other countries.”

Lack of political will to act?

Sheather attributes “the lack of action by the Financial Markets Authority in cleaning up the bad behaviour of vertically integrated organisations, and a tolerance of high and unfair fees on managed funds” to a legacy of the previous government being keen to not constrain banking profits.

“In my opinion, if you have a government of ex-bankers and aspiring bankers, its policies are going to be aimed at keeping the banks happy.”

Sheather thinks the new Labour government “has a chance to roll back the corrupt bargain that exists between government and the finance sector” and recommends it set up a royal commission in New Zealand similar to the Australian initiative.

“This would also be a huge political coup for the coalition government as no doubt the National Party would be highly critical of the decision to conduct a royal commission.”

Sheather notes how much flak Malcolm Turnbull’s conservative government is taking for having rejected calls for an inquiry for years — not least because Turnbull is a former investment banker himself. “The Australian government was extremely reluctant to conduct a royal commission and senior ministers like Treasurer Scott Morrison, who publicly criticised the proposal, are now under pressure to resign.”

Part of the cure for New Zealand, Sheather says, involves a reorganisation of the FMA. “Around half of the current FMA board is made up of individuals who are directors or executives of fund managers and banks. This is clearly inconsistent with best practice overseas — such as the boards of the Securities and Exchange Commission in the US and the UK’s Financial Conduct Authority — and may be part of the reason why we are where we are.”

He also wants changes at the Ministry of Business, Innovation and Employment. “MBIE has, in my view, bungled regulation consistently since 2008 and a cynic would observe that the regulations are such that they accommodate the profitability of vertically integrated organisations at the expense of the retirements of retail investors.”

The other part of Sheather’s recommended cure is to enforce a split of commercial banking from advice so that advisers are truly independent of the origins of the product they are steering investors towards. He likes the Glass-Steagall Act as a model. It was passed in the United States in 1933 to ensure the separation of commercial and investment banking, although it has now been rolled back.

Sheather: “We need our own version of Glass-Steagall in New Zealand and Australia. Institutions like banks cannot ‘manage’ a conflict like this — as the current proceedings in Australia illustrate.”

Sheather reiterates that he is “unconflicted” in speaking out against current banking and finance sector practices and in calling for an inquiry.

“Indeed, the worse my competitors behave, the more it improves my firm’s comparative advantage. The retirement outcomes of all New Zealanders are what is at stake here.”